On January 3rd, 2009, Satoshi Nakamoto mined bitcoins genesis block, and in doing so launched what I believe will be one of the most important assets and technologies in all recorded history. I realize that calling bitcoin the greatest asset in history is a strong statement and I am sure there are many who would dispute it. But I’m sticking by my claim until someone puts forth evidence of another asset or asset class whose growth and technological importance exceeds that of bitcoin or the whole crypto asset class. After all, bitcoin was the seed that led to the creation of a whole new asset class.
Also, I am not making that claim strictly due to the price appreciation of bitcoin and the rest of the asset class but also because of how I believe they will change our financial system. We must remember that blockchain technology and cryptocurrencies are still in their infancy. We have seen incredible change in just the last 1 to 2 years and I am confident that we will continue to see innovation and the development of applications that we cannot even imagine today.
Looking back at the price history of bitcoin and really the entire crypto market the one thing that is most obvious is how volatile the price history has been. I believe a lot of that can be attributed to it being a very young asset class, suffering from low liquidity, and possibly even concentrated ownership. As bitcoin and the crypto market matures,
I believe that the wild price swings will be dampened by a broadening of the ownership base and increasing trade volumes. Other possible causes of volatility could be an excess of leveraged trading as well as an influx of inexperienced retail traders during bull markets. Going forward I will be strictly talking about bitcoins price history because the market cycles are controlled mainly by bitcoin anyway.
Bitcoin Weekly Chart 2011 to 2021 (Log Scale)
Looking back at the price history since the fall of 2011 it looks as though bitcoin has moved in 4-year cycles. It’s possible that this is because of the halving that occurs every four years. The halving is an event when the amount of bitcoin that is created with each new block gets cut in half, this will continue until about the year 2140 when the last bitcoin is mined. Unfortunately, because of the short history of bitcoin, it is a little difficult to have a lot of confidence that as far as length that there really is an actual pattern.
In my opinion there really is only two market cycles that we can use for this analysis. The 2011 to 2015 market cycle and the 2015 to 2019 market cycle. Obviously, I am not counting the current market cycle because we don’t know yet just how it is going to play out. I should say though that for this article I am not as interested in the length of the market cycle as I am in the size of the price swings.
Bitcoin Bull and Bear Market Cycles
Moving on to the price swings I will be including the drop from the 2011 peak, along with the drops from the 2013 and 2017 peaks. Comparing the three they are consistent, there was about a 94% drop after the 2011 peak, about an 86% drop from the 2013 peak, and about an 84% drop after the 2017 peak. During this current market cycle, we have seen bitcoin peak at a new all-time high of almost $65,000 on April 14th, 2021, then drop about 55% over the next three months. Since hitting a low of around $29,000 back in July bitcoin has recovered over 70% to just over $50,000 before pulling back to where it is today at around $47,000. This is all happening as I am writing this, so we don’t really know if the peak for this market cycle occurred in April or if bitcoin still has more upside ahead of it.
To be honest I am a bit torn, in some ways it seems to me that the peak in April most likely was the market cycle peak but then, on the other hand, I am seeing some signs that point to bitcoin not being done for this cycle.
Okay, so looking at the bear markets to date we can see that they all have been pretty severe. Moving forward though, is it possible that we could see a dampening of the market cycle with the bear markets becoming shallower? In my opinion yes, I feel that it is only a matter of time as the market matures and the investor base broadens.
In my opinion, one of the biggest reasons will be due to a huge change in the investor demographics, namely big institutions. The past year or so has seen a tidal wave of institutional investors and large corporations jumping into cryptocurrencies, mainly Bitcoin and Ethereum. Major corporations that are investing in bitcoin or facilitating the purchase of bitcoin include Micro Strategies, Tesla, Square, Coinbase, Mastercard, Visa, Goldman Sachs, Morgan Stanley, PayPal, and Fidelity to name just a few.
The top ten companies with the most bitcoin hold over 204,000 bitcoin valued today at over $9.8 billion. There are also countless other institutional investors that have jumped into cryptocurrencies over the last 1 to 2 years. The importance of large corporations purchasing bitcoin is that in my opinion, they are much less likely to jump in and out of bitcoin and instead are investing for the long term.
Another reason I believe it is possible is because of the broader range of practical applications that have been developed in the rest of the crypto space over the last year, like Decentralized Finance (DeFi), NFT’s, and an increasing number of crypto projects launching in the Metaverse.
Decentralized finance is a blockchain-based financial system that does not rely on intermediaries (Banks, Exchanges, Brokerages) to offer financial products. They instead utilize smart contracts on a blockchain to verify and complete transactions. Defi protocols and platforms offer many of the same products as the traditional financial system but are open to anyone, transparent, and permissionless as opposed to the closed traditional financial systems.
An NFT or non-fungible token is a unit of data stored on the blockchain that certifies a digital asset as unique, and owning the NFT certifies that you own the original. Non-fungible means that it can’t be replaced or exchanged with something else. A dollar bill is fungible because it can be exchanged for another dollar bill, and you will have the same thing. A one-of-a-kind piece of art or a rare one-of-a-kind trading card are examples of non-fungible items.
Really anything digital and unique can be minted into an NFT, digital art, digital music, video clips, and digital audio clips are a few examples. The popularity of NFT’s has exploded over the last 12 months with numerous NFT sites coming online and some NFT’s selling at crazy prices. Whether or not this is just a fade like Crypto Kitties remains to be seen but I personally believe they are here to stay. So far, I haven’t dove too deep down the NFT rabbit hole myself, although I did purchase some ZED RUN racehorses, a few Star Atlas space ships, and some Axies.
ZED RUN Racehorse
Another practical application is crypto projects that are now being built for the metaverse. So first what is the metaverse? Here is the definition from Wikipedia: “The Metaverse is a collective virtual shared space, created by the convergence of virtually enhanced physical reality and physically persistent virtual space, including the sum of all virtual worlds, augmented reality, and the Internet”. Or in simpler terms a virtual world where pretty much anything is possible.
DJ Playing Music in Decentraland
Decentraland is a virtual reality platform on the Ethereum blockchain. It is a user-owned virtual world where you can buy property, and even build on that property. The thing I enjoy doing the most though is to just explore everything that is in Decentraland. You can play decentralized games, visit a real casino, visit art galleries (Sotheby’s has on there), you can even dance and listen to live music at one of the clubs. The SandBox and Enjin are two more virtual reality platforms like Decentraland.
For those of you who love gaming, Star Atlas will be launching the first iteration of the game soon. They plan to roll out the game in stages, with each successive stage players will have more functionality. Star Atlas is a play-to-earn blockchain-based multi-player gaming metaverse built on the super-fast Solana blockchain. Star Atlas is a space-themed grand strategy game where three factions battle for control and political domination. The Star Atlas universe is enormous where players can claim land, set up a mining operation, and then process and sell the resources.
There are three zones in the universe, the first is a faction-secured safe zone. This zone is a good place to learn the game mechanics, you can still take part in all aspects of the game with the exception of destructive combat. The second zone is the medium-level zone that allows players to engage in combat with computer-controlled mercenaries. In this zone, you can engage in combat without the risk of permanently losing your ship.
The third zone is basically the wild west where there is full all-out combat and where parts of your ship or the whole ship could be permanently destroyed. The winners of these battles will be allowed to scavenge the remaining parts of your ship for scrap. Enter this zone at your own risk!
From everything that I have read about what the developers of Star Atlas have planned, even if they deliver on half of it the game should be incredible. The game real-time graphics are powered by Unreal Engine 5 giving the game true cinematic quality.
Our world is moving in a direction where more and more time will be spent in virtual worlds, especially younger generations as they grow up in a progressively more digital world. I believe these blockchain-based play-to-earn games are the future of gaming. Once players experience true ownership of in-game digital assets which they can openly trade and sell either in the game itself or on a secondary exchange there will be no going back. Combine that with the aspect of being able to earn crypto and actually profit from playing a game, I believe this will initiate a paradigm shift in the gaming industry.
Star Atlas Image
Star Atlas Image
In my opinion, just the play-to-earn games alone will introduce millions of people to cryptocurrencies and will play an important role in mainstreaming the use of cryptocurrencies. I think this will also lead to increased use of cryptocurrencies in the real world, as players transfer their in-game experience with crypto to other parts of their life.
One final reason I believe that bitcoins market cycles may change will be due to the ease at which the average person can now buy and hold cryptocurrencies. Over the last year, it has become much easier for the average person to purchase cryptocurrencies. On October 21st, 2020, PayPal announced that their eligible US account holders could now buy, sell, and hold cryptocurrency from their PayPal accounts. PayPal also signaled its plans to make cryptocurrencies a funding source for purchases at its 26 million merchants worldwide.
It is also becoming much easier to buy cryptocurrencies at ATMs as the number of ATMs worldwide increases. So far this year over 10,000 ATMs have been installed, an increase of over 70% from last year. All of this will massively expand the investor base which I feel will help stabilize bitcoins price. Now, I’m not saying though that bitcoin will become like a stablecoin but the days of 85% to 90% bear markets may be coming to an end. I also feel that we could see the length of the market cycles change as well, as the market expands and matures, I feel it will mimic other asset markets.
Whether or not bitcoins market cycles do change over time remains to be seen. But as I said earlier, I believe they will as the market ages and mass adoption become a reality.